Tuesday, February 24, 2009

In the midst of this recession fraught with layoffs, companies can take positive action to reduce trade secret theft by their former employees. In a dark economy, trade secret theft tends to increase (see Ponemon Institute Report). Trade secret theft by former employees may be driven by (a) potential employees wanting to look more attractive to potential employers; and (b) disgruntled employees who want to see their former employer hurt. Along with the usual steps to protect their trade secrets, companies can create a positive post-employee environment that instills responsibility and pride in former employees to mitigate those negative driving forces.

Basic trade secret law requires that to be protectable, the secret derives economic value from not being known and is the subject of efforts to maintain secrecy. Trade Secrets can be customer lists, details about employees, technical information about a product, methods for doing business, manufacturing methods, and a host of other information that comprises the "secret sauce" for a business' success.

A company may wish to stop an employee from working for a competitor or to reduce the possibility of trade secret theft – but, under California law, they can't. In tension with companies' needs to protect their trade secret 'crown jewels,' in California, we have a strong policy and legal structure that supports the free mobility of employees. In Silicon Valley, this principle is especially strong where employees are notorious for their mobility – often viewed as job-hoppers in other parts of the country – and where a lot of competitors are located in a very small geography.

Covenants not to compete are largely illegal in California – thus allowing a former employee to work directly for a competitor. In fact, a proponent of covenant not to compete can be held liable for tort of unfair competition. Additionally, as California public policy, it is likely that the principles of free employee mobility may even be applied to employees outside of California who are employed by a California corporation. A company cannot end-run this principle with penalties: if a company does not restrain a former employee from working for a competitor, but when the employee does, the company imposes forfeiture of stock or some other financial or benefit penalty – this is illegal.

So, what are the categories of cases when you think a competitor is getting your trade secrets from your former employees?

There are 2 main categories of cases: the smoking gun and gee-how'd-they-do-that? cases.

The smoking gun cases are the easy ones – these are the cases that get litigated, and the company almost always wins: the company has the video tape of employee walking out of the building with a box filled with prototypes or company computer equipment; or, a friend of a former employee "rats" about seeing shelves full of computer equipment belonging to the company in employee's private storage unit. These cases are easy to litigate, because the evidence is handed to the company on a silver platter. With that evidence, it is relatively easy to get a court order to seek more evidence of theft that may still be in the former employee's possession.

The harder ones are the gee-how'd-they-do-that? cases. These are cases where it is highly likely that the competitor gained your company's trade secret information improperly but you can't prove it – it just 'smells' bad. These cases rarely get litigated, because it is almost impossible to get hard evidence of theft: the competitor comes out with a feature similar to your company's in record time; the competitor starts coming out with several patents that are in your space, where they'd had none before; a stream of employees leave your company for the competitor over a year or so – this employee-drift may indicate the use of knowledge about company personnel (who is loose-in-the-saddle; work schedule preferences/needs (kids, commute, etc); strengths and weaknesses in competency; salaries). These cases are hard to litigate, because getting real evidence is almost impossible. In order to get a court order to get access to a former employee's home computer, home files or personal gmail or yahoo email account, there must be more than just a 'bad smell.'

So, what do you do to protect your company's trade secrets?

Well, there is the usual stuff:

During employment: hold an annual "employee awareness program" about what trade secrets are, why they are important to the company, and what the penalties for improper disclosure are. These can be in the form of a meeting, written reminders or a memo from the CEO to all employees. Also, make sure all employees sign a non-disclosure agreement and an invention assignment agreement. Your company may want to perform an audit to make sure all employees have actually turned in the paperwork, and that the agreements themselves are complete and current with the law. Hold employee training sessions to help employees understand what confidential information actually is, and what they are supposed to do to restrict its use and disclosure.

Upon termination of employment: make sure that the employee is given an oral and written reminder of his or her obligations during the exit interview; request that the employee give a written reaffirmation of his or her confidentiality obligations; provide duplicate copies of the non-disclosure agreement and inventions agreement that the person signed at the beginning of his or her employment. Also, make sure the employee returns all company property and provides written confirmation that s/he as actually returned it all: engineering notebooks, marketing/business plans, financial information, customer and vendor lists, company personnel information. Lastly, be sure to preserve integrity of the former employee's computer information – mirror the hard drive, and if possible preserve the hard drive itself - back-up all emails and preserve back-up tapes.

If the suspicion of trade secret theft by a competitor becomes more intense, consider escalating the communication by sending a letter to the former employee's new employer, notifying the new employer of the former employee's post-employment obligations, and providing a copy of the non-disclosure agreement signed by the former employee with the company.

Environmental Support: Because the source of trade secret theft is often a disgruntled former employee, creating an environment that instills responsibility and pride in former employees is important. If a former employee has good feelings and a sense of accomplishment from her or his former company, s/he is less likely to want to see it hurt by a competitor. Also, creating a network of current and former employees creates a community where an individual is known and can be held accountable. The community can impose shame or ostracize a renegade former employee who denigrates the achievements of his or her colleagues, or (more directly) hurts the stock price of current stock holders in that community.

Creating a positive environment for former employees is in its self-interest, yet it is often antithetical to a company's instincts. Companies often want to cut off all ties with and renounce completely a former employee. In turn, the former employee may feel abandoned, rejected and depressed -- leading to disgruntlement. In the end, a company's myopic consciousness can only hurt it. A company must be practical and growth-oriented looking in its actions. Creating a positive environment for former employees costs little, and may, indeed, lead to positive outcomes for the company: former employees who have experienced a positive post-employment environment may be more inclined to create new business opportunities for the company when they move to positions in other companies; they may be more helpful to the company if their testimony is needed down-the-line in litigation (especially for engineers in patent or other technology disputes); and of course – importantly for this article – former employees may be less inclined to leak information to competitors that may be harmful to the company out of a sense of pride.

So how do you create an environment where former employees are not pariah?

The company can provide post-employment support in the form of structured networking groups and meetings between former employees. Companies are often loathe to provide references for former employees (and there are good legal reasons for this), but it might want to soften its policy for employees who wish to do this for former employees. The company can provide job seeking resources for RIFed employees, including introductions to recruiters, and a job board with exclusive listings for "alumni". Another great resource is LinkedIn. Many companies have alumni groups that allow networking between former employees, to not only help them find new opportunities, but also to create that sense of community and connected-ness to others.

About Me

Interim, project and part-time general counsel services to small and mid-sized companies on business development initiatives and legal and business support for domestic firms implementing globalization strategies and foreign firms seeking local counsel services in the US. Collaboration with business owners and managers, and design strategic plans to promote growth and optimize financial returns.

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